ASLB 36 Associates and JV
Accounting Standard for Local Bodies (ASLB) 36
Investments in Associates and Joint Ventures
Contents
Paragraphs
OBJECTIVE 1
SCOPE 2-7
DEFINITIONS 8-9
Binding Arrangement 9
SIGNIFICANT INFLUENCE 10-15
EQUITY METHOD 16-21
APPLICATION OF THE EQUITY METHOD 22-48
Exemptions from Applying the Equity Method 23-25
Discontinuing the Use of the Equity Method 26-27
Changes in Ownership Interest 28
Equity Method Procedures 29-42
Impairment Losses 43-48
SEPARATE FINANCIAL STATEMENTS 49
APPENDIX A ILLUSTRATIVE EXAMPLES
APPENDIX 1 COMPARISON WITH IPSAS 36, ‘INVESTMENT IN
ASSOCIATES AND JOINT VENTURES’
APPENDIX 2 COMPARISON WITH EXISTING AS 23, ‘ACCOUNTING FOR
INVESTMENT IN ASSOCIATES IN CONSOLIDATED FINANCIAL
STATEMENTS’
Compendium of Accounting Standards for Local Bodies (ASLBs)
Accounting Standard for Local Bodies (ASLB) 36
Investments in Associates and Joint Ventures
(This Accounting Standard includes paragraphs set in bold italic type and
plain type, which have equal authority. Paragraphs in bold italic type indicate
the main principles. This Accounting Standard should be read in the context
of its objective and the ‘Preface to Accounting Standards for Local Bodies 1’.)
The Accounting Standards for Local Bodies (ASLB) 36, „Investment in
Associates and Joint Ventures‟, issued by the Council of the Institute of the
Chartered Accountants of India, will be recommendatory in nature in the
initial years for use by the Local Bodies. This Standard will be mandatory for
local bodies in a State from the date specified in this regard by the State
Government concerned 2.
The following is the text of the Accounting Standard for Local Bodies:
Objective
1. The objective of this Standard is to prescribe the accounting for
investments in associates and joint ventures and to set out the
requirements for the application of the equity method when accounting
for investments in associates and joint ventures.
Scope
2. An entity that prepares and presents financial statements under
the accrual basis of accounting should apply this Standard in
accounting for investments in associates and joint ventures.
2A. This Standard applies to all entities described as Local Bodies in
the ‘Preface to the Accounting Standards for Local Bodies’ 3.
3. This Standard should be applied by all entities that are investors
with significant influence over, or joint control of, an investee
1 Attention is specifically drawn to paragraph 4.2 of the ‘Preface to Accounting
Standards for Local Bodies’, according to which Accounting Standards are intended
to apply only to items which are material.
2 In respect of compliance with the Accounting Standards for Local Bodies, reference
may be made to the paragraph 7.1 of the ‘Preface to the Accounting Standards for
Local Bodies’.
3 Refer paragraph 1.3 of the „Preface to the Accounting Standards for Local Bodies‟.
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Investments in Associates and Joint Ventures
where the investment leads to the holding of a quantifiable
ownership interest.
4. This Standard provides the basis for accounting for ownership
interests in associates and joint ventures. That is, the investment in
the other entity confers on the entity the risks and rewards incidental
to an ownership interest. This Standard applies only to quantifiable
ownership interests. This includes ownership interests arising from
investments in the formal equity structure of another entity. A formal
equity structure means share capital or an equivalent form of capital,
such as units in a property trust. Quantifiable ownership interests may
also include ownership interests arising from other investments in
which the entity's ownership interest can be measured reliably 4 (for
example, interests in a partnership). Where the equity structure of the
other entity is poorly defined, it may not be possible to obtain a reliable
measure of the ownership interest.
5. Some contributions made by local bodies may be referred to as an
"investment", but may not give rise to an ownership interest. For
example, a local body may make a substantial investment in the
development of a hospital that is owned and operated by the other
entity. While such contributions are non-exchange in nature, they allow
the local body to participate in the operation of the hospital, and the
other entity owning the hospital is accountable to the local body for its
use of public monies. However, the contributions made by the local
body do not constitute an ownership interest, as the other entity could
seek alternative funding and thereby prevent local body from
participating in the operation of the hospital. Accordingly, the local
body is not exposed to the risks, nor does it enjoy the rewards, that
are incidental to an ownership interest.
6. [Deleted]
7. [Deleted]
4 Information that is reliable is free from material error and bias, and can be depended
on by users to faithfully represent that which it purports to represent or could
reasonably be expected to represent.
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Definitions
8. The following terms are used in this Standard with the meanings
specified:
An associate is an entity over which the investor has significant
influence.
Binding arrangement: For the purposes of this Standard, a
binding arrangement is an arrangement that confers enforceable
rights and obligations on the parties to it as if it were in the form
of a contract. It includes rights from contracts or other legal
rights.
Consolidated financial statements are the financial statements of
an economic entity in which assets, liabilities, net assets/equity,
revenue, expenses and cash flows of the controlling entity and its
controlled entities are presented as those of a single economic
entity.
The equity method is a method of accounting whereby the
investment is initially recognised at cost and adjusted thereafter
for the post-acquisition change in the investor's share of the
investee's net assets/equity of the associate or joint venture. The
investor's surplus or deficit includes its share of the investee's
surplus or deficit and the investor's net assets/equity includes its
share of changes in the investee's net assets/equity that have not
been recognised in the investee's surplus or deficit.
A joint arrangement is an arrangement of which two or more
parties have joint control.
Joint control is the agreed sharing of control of an arrangement
by way of a binding arrangement, which exists only when
decisions about the relevant activities require the unanimous
consent of the parties sharing control.
A joint venture is a joint arrangement whereby the parties that
have joint control of the arrangement have rights to the net
assets of the arrangement.
A joint venturer is a party to a joint venture that has joint control
of that joint venture.
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Investments in Associates and Joint Ventures
Significant influence is the power to participate in the financial
and operating policy decisions of another entity but is not control
or joint control of those policies.
Terms defined in other ASLBs are used in this Standard with the
same meaning as in those Standards. The following terms are
defined in either ASLB 34, ‘Separate Financial Statements’, ASLB
35, ‘Consolidated Financial Statements’, or ASLB 37, ‘Joint
Arrangements’5: benefits, control, controlled entity, controlling
entity, economic entity, investment entity, joint operation, power
and separate financial statements.
Binding Arrangement
9. Binding arrangement can be evidenced in several ways. A binding
arrangement is often, but not always, in writing, in the form of a
contract or documented discussions between the parties. Statutory
mechanisms such as legislative or executive authority can also create
enforceable arrangements, similar to contractual arrangements, either
on their own, or in conjunction with contracts between the parties.
Significant Influence
10. Whether an investor has significant influence over the investee is a
matter of judgment based on the nature of the relationship between
the investor and the investee, and on the definition of significant
influence in this Standard. This Standard applies only to those
associates in which an entity holds a quantifiable ownership interest
either in the form of a shareholding or other formal equity structure or
in another form in which the entity's interest can be measured reliably.
11. If an entity holds a quantifiable ownership interest and it holds, directly
or indirectly (e.g., through controlled entities), 20 per cent or more of
the voting power of the investee, it is presumed that the entity has
significant influence, unless it can be clearly demonstrated that this is
not the case. Conversely, if the entity holds, directly or indirectly (e.g.,
through controlled entities), less than 20 per cent of the voting power
5 The Standard makes a reference to ASLBs 35 and 37 that are yet to be formulated/
issued. The Guidance in regard to those may be obtained from other corresponding
pronouncements as per the hierarchy prescribed in paragraph 15 of the ASLB 3,
‘Accounting Policies, Changes in Accounting Estimates, and Errors’.
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of the investee, it is presumed that the entity does not have significant
influence, unless such influence can be clearly demonstrated. A
substantial or majority ownership by another investor does not
necessarily preclude an entity from having significant influence.
12. The existence of significant influence by an entity is usually evidenced
in one or more of the following ways:
(a) Representation on the board of directors or equivalent
governing body of the investee;
(b) Participation in policy-making processes, including participation
in decisions about dividends or similar distributions;
(c) Material transactions between the entity and its investee;
(d) Interchange of managerial personnel; or
(e) Provision of essential technical information.
13-14. [Refer Appendix-1]
15. An entity loses significant influence over an investee when it loses the
power to participate in the financial and operating policy decisions of
that investee. The loss of significant influence can occur with or
without a change in absolute or relative ownership levels. It could
occur, for example, when an associate becomes subject to the control
of another government, a court or an administrator. It could also occur
as a result of a binding arrangement.
Equity Method
16. Under the equity method, on initial recognition the investment in an
associate or a joint venture is recognised at cost and the carrying
amount is increased or decreased to recognise the investor's share of
the surplus or deficit of the investee after the date of acquisition. The
investor's share of the investee's surplus or deficit is recognised in the
investor's surplus or deficit. Distributions received from an investee
reduce the carrying amount of the investment. Adjustments to the
carrying amount may also be necessary for changes in the investor's
proportionate interest in the investee arising from changes in the
investee's equity that have not been recognised in the investee's
surplus or deficit. Such changes include those arising from the
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Investments in Associates and Joint Ventures
revaluation of property, plant and equipment and from foreign
exchange translation differences. The investor's share of those
changes is recognised in net assets/equity of the investor.
17. The recognition of revenue on the basis of distributions received may
not be an adequate measure of the revenue earned by an investor on
an investment in an associate or a joint venture because the
distributions received may bear little relation to the performance of the
associate or joint venture. Because the investor has joint control of, or
significant influence over, the investee, the investor has an interest in
the associate's or joint venture's performance and, as a result, the
return on its investment. The investor accounts for this interest by
extending the scope of its financial statements to include its share of
the surplus or deficit of such an investee. As a result, application of the
equity method provides more informative reporting of the investor's net
assets/equity and surplus or deficit.
18-20. [Refer Appendix 1]
21. An investment in an associate or a joint venture accounted for
using the equity method should be classified as a non-current
asset.
Application of the Equity Method
22. An entity with joint control of, or significant influence over, an
investee should account for its investment in associate or a joint
venture using the equity method except when that investment
qualifies for exemption in accordance with paragraphs 23-25.
Exemptions from Applying the Equity Method
23. An entity need not apply the equity method to its investment in an
associate or a joint venture if the entity is a controlling entity that is
exempt from preparing consolidated financial statements by the scope
exception in paragraph 5 of ASLB 35 or if all of the following apply 6:
(a) The entity itself is a controlled entity and the information needs
6 Normally, the conditions mentioned here may not be applicable to the local bodies in
India. However, any entity controlled by a local body (for example corporate
municipal entity as referred in SEBI regulations for issuance of Municipal Bonds) may
have such structure that these exemptions may apply.
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of users are met by its controlling entity's consolidated financial
statements, and, in the case of a partially owned entity, all its
other owners, including those not otherwise entitled to vote,
have been informed about, and do not object to, the entity not
applying the equity method.
(b) The entity's debt or equity instruments are not traded in a public
market (a domestic or foreign stock exchange or an over-the-
counter market, including local and regional markets).
(c) The entity did not file, nor is it in the process of filing, its
financial statements with a securities commission or other
regulatory organization, for the purpose of issuing any class of
instruments in a public market.
(d) The ultimate or any intermediate controlling entity of the entity
produces financial statements available for public use that
comply with ASLBs, in which controlled entities are consolidated
or are measured at fair value in accordance with ASLB 35.
24. When an investment in an associate or a joint venture is held by, or is
held indirectly through, an entity that is a venture capital organisation,
or a mutual fund, unit trust and similar entities including investment-
linked insurance funds, the entity may elect to measure investments in
those associates and joint ventures at fair value through surplus or
deficit in accordance with guidance on “Financial Instruments”7. An
investment entity will, by definition, have made this election.
25. When an entity has an investment in an associate, a portion of which
is held indirectly through a venture capital organization, or a mutual
fund, unit trust and similar entities including investment-linked
insurance funds, the entity may elect to measure that portion of the
investment in the associate in accordance with paragraph 24,
regardless of whether the venture capital organization, or the mutual
fund, unit trust and similar entities including investment-linked
insurance funds, has significant influence over that portion of the
investment. If the entity makes that election, the entity should apply
the equity method to any remaining portion of its investment in an
7 The Guidance with regard to “Financial Instruments” may be obtained from other
corresponding pronouncements as per the hierarchy prescribed in paragraph 15 of
the ASLB 3, ‘Accounting Policies, Changes in Accounting Estimates, and Errors’.
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Investments in Associates and Joint Ventures
associate that is not held through a venture capital organization, or a
mutual fund, unit trust and similar entities including investment-linked
insurance funds. When an entity has an investment in an associate, a
portion of which is held indirectly through an investment entity, the
entity should measure that portion of the investment at fair value
through surplus or deficit in accordance with paragraph 24.
Discontinuing the Use of the Equity Method
26. An entity should discontinue the use of the equity method from
the date when its investment ceases to be an associate or a joint
venture as follows:
(a) If the investment becomes a controlled entity, the entity
should account for its investment in accordance with ASLB
40, ‘Entity Combinations’ and ASLB 35, ‘Consolidated
Financial Statements’.
(b) If the retained interest in the former associate or joint
venture is a financial asset, the entity should measure the
retained interest at fair value. The entity should measure
the retained interest at the carrying amount of the
investment at the date that it ceases to be an associate or
joint venture and that carrying amount, if it is impracticable
to determine the fair value. The entity should recognise in
surplus or deficit any difference between:
(i) The fair value (or, where relevant, the carrying
amount) of any retained interest and any proceeds
from disposing of a part interest in the associate or
joint venture; and
(ii) The carrying amount of the investment at the date the
equity method was discontinued.
(c) When an entity discontinues the use of the equity method,
the entity should account for all amounts previously
recognised directly in the entity's net assets/equity in
relation to that investment on the same basis as would have
been required if the investee had directly disposed of the
related assets or liabilities.
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27. If an investment in an associate becomes an investment in a joint
venture or an investment in a joint venture becomes an
investment in an associate, the entity continues to apply the
equity method and does not remeasure the retained interest.
Changes in Ownership Interest
28. If an entity's ownership interest in an associate or a joint venture is
reduced, but the investment continues to be classified either as an
associate or a joint venture respectively, the entity should transfer
directly to accumulated surpluses or deficits the proportion of the gain
or loss that had previously been recognised in net assets/equity
relating to that reduction in ownership interest if that gain or loss would
be required to be transferred directly to accumulated surpluses or
deficits on the disposal of the related assets or liabilities.
Equity Method Procedures
29. Many of the procedures that are appropriate for the application of the
equity method are similar to the consolidation procedures described in
ASLB 35. Furthermore, the concepts underlying the procedures used
in accounting for the acquisition of a controlled entity are also adopted
in accounting for the acquisition of an investment in an associate or a
joint venture.
30. An economic entity's share in an associate or a joint venture is the
aggregate of the holdings in that associate or joint venture by the
controlling entity and its controlled entities. The holdings of the
economic entity's other associates or joint ventures are ignored for this
purpose. When an associate or a joint venture has controlled entities,
associates or joint ventures, the surplus or deficit and net assets taken
into account in applying the equity method are those recognised in the
associate's or joint venture's financial statements (including the
associate's or joint venture's share of the surpluses or deficits and net
assets of its associates and joint ventures), after any adjustments
necessary to give effect to uniform accounting policies (see
paragraphs 37-39).
31. Gains and losses resulting from "upstream" and "downstream"
transactions involving assets that do not constitute an operation, as
defined in ASLB 40, between an entity (including its consolidated
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Investments in Associates and Joint Ventures
controlled entities) and its associate or joint venture are recognised in
the entity's financial statements only to the extent of unrelated
investors' interests in the associate or joint venture. "Upstream"
transactions are, for example, sales of assets from an associate or a
joint venture to the investor. The entity's share in the associate's or the
joint venture's gains or losses resulting from these transactions is
eliminated. "Downstream" transactions are, for example, sales or
contributions of assets from the investor to its associate or its joint
venture.
32. When downstream transactions provide evidence of a reduction in the
net realizable value of the assets to be sold or contributed, or of an
impairment loss of those assets, those losses should be recognised in
full by the investor. When upstream transactions provide evidence of a
reduction in the net realizable value of the assets to be purchased or
of an impairment loss of those assets, the investor should recognise
its share in those losses.
33. The gain or loss resulting from the contribution of non-monetary assets
that do not constitute an operation, as defined in ASLB 40, to an
associate or a joint venture in exchange for an equity interest in that
associate or joint venture should be accounted for in accordance with
paragraph 31, except when the contribution lacks commercial
substance, as that term is described in ASLB 17, „Property, Plant and
Equipment’. If such a contribution lacks commercial substance, the
gain or loss is regarded as unrealised and is not recognised unless
paragraph 34 also applies. Such unrealised gains and losses should
be eliminated against the investment accounted for using the equity
method and should not be presented as deferred gains or losses in the
entity's consolidated statement of financial position or in the entity's
statement of financial position in which investments are accounted for
using the equity method.
34. If, in addition to receiving an equity interest in an associate or a joint
venture, an entity receives monetary or non-monetary assets, the
entity recognises in full in surplus or deficit the portion of the gain or
loss on the contribution relating to the monetary or non-monetary
assets received.
34A. The gain or loss resulting from a downstream transaction involving
assets that constitute an operation, as defined in ASLB 40, between
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Compendium of Accounting Standards for Local Bodies (ASLBs)
an entity (including its consolidated controlled entities) and its
associate or joint venture is recognised in full in the investor's financial
statements.
34B. An entity might sell or contribute assets in two or more arrangements
(transactions).When determining whether assets that are sold or
contributed constitute an operation, as defined in ASLB 40, an entity
should consider whether the sale or contribution of those assets is
part of multiple arrangements that should be accounted for as a single
transaction in accordance with the requirements of ASLB 35.
35. An investment is accounted for using the equity method from the date
on which it becomes an associate or a joint venture. On acquisition of
the investment, any difference between the cost of the investment the
entity's share of the net fair value of the investee's identifiable assets
and liabilities is accounted for as follows:
(a) When an entity has included goodwill relating to an associate or
a joint venture in the carrying amount of the investment,
amortisation of that goodwill is not permitted.
(b) Any excess of the entity's share of the net fair value of the
investee's identifiable assets and liabilities over the cost of the
investment is included as revenue in the determination of the
entity's share of the associate or joint venture's surplus or
deficit in the period in which the investment is acquired.
Appropriate adjustments to the entity's share of the associate's or joint
venture's surplus or deficit after acquisition are made in order to
account, for example, for depreciation of the depreciable assets based
on their fair values at the acquisition date. Similarly, appropriate
adjustments to the entity's share of the associate's or joint venture's
surplus or deficit after acquisition are made for impairment losses
such as for property, plant and equipment or, where relevant, goodwill.
36. The most recent available financial statements of the associate or
joint venture are used by the entity in applying the equity method.
When the end of the reporting period of the entity is different
from that of an associate or a joint venture, the associate or joint
venture prepares for the use of entity, financial information as of
the same date as the financial statements of the entity unless it is
impracticable to do so.
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Investments in Associates and Joint Ventures
36A. When in accordance with paragraph 36, the financial statements of an
associate or a joint venture used in applying the equity method are
prepared as of a date different from that used by the entity,
adjustments should be made for the effects of significant transactions
or events that occur between that date and the date of the entity‟s
financial statements. In any case, the difference between the end of
the reporting period of the associate or joint venture and that of the
entity should be no more than three months. The length of the
reporting periods and any difference between the ends of the reporting
periods should be the same from period to period.
37. The entity usually prepares consolidated financial statements
using uniform accounting policies for the like transactions and
events in similar circumstances. In case an associate uses
accounting policies other than those adopted for the consolidated
financial statements for like transactions and events in similar
circumstances, appropriate adjustments are made to the
associate’s financial statements when they are used by the
investor in applying the equity method. If it is not practicable to
do so, that fact is disclosed along with a brief description of the
differences between the accounting policies.
38. Except as described in paragraph 39, if an associate or a joint venture
uses accounting policies other than those of the entity for like
transactions and events in similar circumstances, adjustments should
be made to make the associate's or joint venture's accounting policies
confirm to those of the entity when the associate's or joint venture's
financial statements are used by the entity in applying the equity
method.
39. Notwithstanding the requirements in paragraph 38, if an entity
has an interest in an associate or a joint venture that is an
investment entity, the entity should, when applying the equity
method, retain the fair value measurement applied by that
investment entity associate or joint venture to its interest in
controlled entities.
40. If an associate or a joint venture has outstanding cumulative
preference shares that are held by parties other than the entity and are
classified as equity, the entity computes its share of surplus or deficit
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after adjusting for the dividends on such shares, whether or not the
dividends have been declared.
41. If an entity's share of the deficit of an associate or a joint venture
equals or exceeds its interest in the associate or joint venture, the
entity discontinues recognizing its share of further deficits. The interest
in an associate or a joint venture is the carrying amount of the
investment in the associate or joint venture determined using the
equity method together with any long-term interests that, in substance,
form part of the entity's net investment in the associate or joint
venture. For example, an item for which settlement is neither planned
nor likely to occur in the foreseeable future is, in substance, an
extension of the entity's investment in that associate or joint venture.
Such items may include preference shares and long-term receivables
or loans, but do not include receivables, payables or any long-term
receivables for which adequate collateral exists, such as secured
loans. Deficits recognised using the equity method in excess of the
entity's investment in ordinary shares are applied to the other
components of the entity's interest in an associate or a joint venture in
the reverse order of their seniority (i.e., priority in liquidation).
42. If, under the equity method, an investor‟s share of losses of an
associate equals or exceeds the carrying amount of the investment,
the investor ordinarily discontinues recognising its share of further
losses and the investment is reported at nil value. Additional losses
are provided for to the extent that the investor has incurred obligations
or made payments on behalf of the associate to satisfy obligations of
the associate that the investor has guaranteed or to which the investor
is otherwise committed. If the associate subsequently reports profits,
the investor resumes including its share of those profits only after its
share of the profits equals the share of net losses that have not been
recognised.
Impairment Losses
43. After application of the equity method, including recognising the
associate's or joint venture's deficits in accordance with Guidance on
“Financial Instruments” to determine whether it is necessary to
recognise any additional impairment loss with respect to its net
investment in the associate or joint venture.
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44. The entity also refers to the Guidance on “Financial Instruments” to
determine whether any additional impairment loss is recognised with
respect to its interest in the associate or joint venture that does not
constitute part of the net investment and the amount of that
impairment loss.
45. Whenever application of Guidance on “Financial Instruments” indicates
that the investment in an associate or a joint venture may be impaired,
an entity applies ASLB 26, „Impairment of Cash-Generating Assets’,
and, possibly, ASLB 21, „Impairment of Non-Cash-Generating Assets’.
46. ASLB 26 directs an entity to determine the value in use of the cash-
generating investment. In determining the value in use of the cash-
generating investment in accordance with ASLB 26, an entity
estimates:
(a) Its share of the present value of the estimated future cash flows
expected to be generated by the associate or joint venture,
including the cash flows from the operations of the associate or
joint venture and the proceeds from the ultimate disposal of the
investment; or
(b) The present value of the estimated future cash flows expected
to arise from dividends or similar distributions to be received
from the investment, and from its ultimate disposal.
Using appropriate assumptions, both methods give the same result.
47. ASLB 21 requires that, if the recoverable service amount of an asset is
less than its carrying amount, the carrying amount should be reduced
to its recoverable service amount. Recoverable service amount is the
higher of an asset's fair value, less costs to sell and its value in use.
Value in use of a non-cash-generating asset is defined as the present
value of the asset's remaining service potential. The present value of
the remaining service potential may be assessed using the
depreciated replacement cost approach, the restoration cost approach
or the service units approach, as appropriate.
48. The recoverable amount of an investment in an associate or a
joint venture should be assessed for each associate or joint
venture, unless the associate or joint venture does not generate
cash inflows from continuing use that are largely independent of
those from other assets of the entity.
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Separate Financial Statements
49. An investment in an associate or a joint venture should be
accounted for in the entity's separate financial statements in
accordance with paragraph 12 of ASLB 34, ‘Separate Financial
Statements’.
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Appendix A
Illustrative Examples
These examples accompany, but are not part of, ASLB 36.
Illustration 1:
Set out below are the draft accounts of ABC Municipal Corporation and its
subsidiaries (Group) and of Associate Co. Group has acquired 40% of the
equity capital of Associate Co. three years ago when the latter's reserves
stood at Rs.10,000.
In 000‟s
Particular Local Bodies Associates
(Consolidated)
Non-Current Assets
Property, Plant and Equipment 250 170
Investment in Associate 60
Loan to Associate 30
Current Assets 120 50
Total 460 220
Capital 250
Share Capital 100
Retained Earnings 130 70
Current Liabilities
Payables 80 30
Loan from local body 20
Total 460 220
Particular Local Bodies Associate
(Consolidated)
Surplus Before Tax 95 80
Income tax expense -35 -30
Surplus for the year 60 50
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Prepare financial statements of the group after accounting for the associate
under Equity accounting.
Solution
Condensed Statement of Income and Expenditure
Particular Local Bodies
(Consolidated)
Surplus 95
Share of profits of associated company (50 x 20
40%)
Surplus before tax 115
Income tax expense -35
Surplus attributable to the members of Local 80
Bodies
Balance Sheet
Asset Local Bodies (Consolidated)
Non-Current Assets
Property, Plant and Equipment 250
Investment in Associates 84
Loan to Associates 30
Current Assets 120
Total 484
Capital 250
Retained Earnings 154
Current Liabilities
Payables 80
Total 484
Retained Earnings Amount
Reserves of Associates 70
Pre-acquisition 10
Post-acquisition 60
Group Share in associate 40%
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Group share in retained earnings 24
Investment in Associates Amount
Cost of investment 60
Share of post-acquisition retained earnings (W) 24
Total 84
Illustration 2:
Whether voting rights on shares held by nominee or in a fiduciary capacity
are considered while evaluating the significant influence of beneficiary
shareholder over the investee?
Response
Paragraph 11 of ASLB 36, inter alia, provides that, “if an entity holds, directly
or indirectly (e.g., through subsidiaries), 20 per cent or more of the voting
power of the investee, it is presumed that the entity has significant influenc e,
unless it can be clearly demonstrated that this is not the case”.
Voting rights on shares held by nominee should be considered while
evaluating the significant influence of beneficiary shareholder over the
investee but not for the evaluation of significant influence by the nominee
shareholder over the investee as such voting rights are exercised by the
nominee as per the directions and in interest of the beneficiary. Further, the
Ministry of Corporate Affairs vide general circular no. 24/2014, dated
25.06.2014 clarified that the shares held by a company in another company
in a 'fiduciary capacity' should not be counted for the purpose of determining
the relationship of 'associate company' under section 2(6) of the Companies
Act, 2013.
Therefore, a corollary is drawn between Companies Act‟s requirement and
ASLB 36. Beneficiary shareholder should not consider the voting rights on
shares held by its nominee or in a fiduciary capacity while evaluating the
significant influence over the investee.
Illustration 3:
ABC Municipal Corporation owns 20% of the voting rights in Y Ltd. and is not
entitled to appoint director to the board which consist of five members. The
remaining 80% of the voting rights are held by two entities each of which is
entitled to appoint the directors.
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Compendium of Accounting Standards for Local Bodies (ASLBs)
A quorum of four directors and a majority of those present are required to
make decisions. ABC Municipal Corporation representative can attend board
meetings but without a vote. Is Y Ltd. an associate of ABC Municipal
Corporation.
Solution
Despite the fact that the ABC Municipal Corporation owns 20% of the voting
rights and has representations on the board, the existence of other
shareholders holding a significant proportion of the voting rights prevent ABC
Municipal Corporation from exerting significant influence. In this situation, Y
Ltd. would not be an associate of ABC Municipal Corporation.
Illustration 4:
ABC Municipal Corporation holds 12% of the voting shares in Boho Ltd. Boho
Ltd.'s board comprise of eight members and two of these members are
appointed by ABC Municipal Corporation. Each board member has one vote
at meeting. Is Boho Ltd. an associate of Kuku Ltd.?
Solution
Boho Ltd. is an associate of ABC Municipal Corporation as significant
influence is demonstrated by the presence of directors on the board and the
relative voting rights at meetings.
Illustration 5:
ABC Municipal Corporation creates a separate legal entity Y Limited in which
it holds less than 20 % of the voting interests, however, controls that entity
through contracts that ensures that decision-making power and the
distribution of profits and losses lies with ABC Municipal Corporation. In such
cases, the investor is able to exercise significant influence over its investee.
Illustration 6:
ABC Municipal Corporation owns 9% equity in Sync Ltd. However, it has the
approval or veto rights over critical decisions of compensation, hiring,
termination, and other operating and capital spending decisions of Sync Ltd.
The non-controlling rights are so restrictive that it is appropriate to infer that
control rests with the Info Ltd. for all major decisions. In this case, it would be
a subsidiary on account of control.
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Investments in Associates and Joint Ventures
Illustration 7:
Q Ltd. manufactures equipment for electric transmission utility of ABC
Municipal Corporation. ABC Municipal Corporation provides all designs for
the equipment and participates in scheduling, timing and quantity of the
production. The majority (i.e., 90%) of Q Ltd.'s sales are made to the ABC
Municipal Corporation. ABC Municipal Corporation has 10% shareholding in
the Q Ltd. It acquired this interest many years ago at the start of their
relationship. Does significant influence exist?
Solution
Q Ltd. is highly dependent on the ABC Municipal Corporation for the
continued existence of the business. Despite having only a 10% interest in Q
Ltd., P Ltd. has significant influence.
Illustration 8:
ABC Municipal Corporation owns 15% of the voting rights of Y Ltd., and the
remainder are widely dispersed among the public. ABC Municipal
Corporation also is the only supplier of crucial raw materials to Y Ltd., further
it provides certain expertise guidance regarding the maintenance of Y Ltd. 's
factory.
Discuss the relationship between ABC Municipal Corporation and Y Ltd.
Solution
Y Ltd. is effectively functioning because of the participation of ABC Municipal
Corporation, in the Y Limited‟s factory despite having 15% interest in Y Ltd.
ABC Municipal Corporation has significant influence.
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Compendium of Accounting Standards for Local Bodies (ASLBs)
Appendix 1
Note: This Appendix is not a part of the Accounting Standard for Local
Bodies. The purpose of this Appendix is only to bring out the major
differences, if any, between Accounting Standard for Local Bodies (ASLB) 36
and the corresponding International Public Sector Accounting Standard
(IPSAS) 36, „Investments in Associates and Joint Ventures’.
Comparison with IPSAS 36, ‘Investments in Associates
and Joint Ventures’
(a) ASLB 36 uses different terminology, in certain instances, from IPSAS
36 such as the terms ‘statement of income and expenditure’, ‘balance
sheet’ and ‘entities’ have been used in place of ‘statement of financial
performance’, ‘statement of financial position’ and ‘public sector
entities’.
(b) The following paragraphs of IPSAS 36 have been deleted. In order to
maintain consistency with the corresponding IPSAS 36, the paragraph
numbers have been retained:
For considering share ownership for the purpose of significant
influence, potential voting rights of the investee held by investor
are not taken into account as per ASLB 36. As per IPSAS 36,
existence and effect of potential voting rights that are currently
exercisable or convertible are considered when assessing
whether an entity has significant influence or not. Paragraph 13-
14 and 18-20 have been deleted in this regard.
Paragraph 50 pertaining to transitional provisions has been
deleted as a separate ASLB 33, „First-time Adoption of ASLBs‟
has been issued that contains all transitional provisions at one
place.
Paragraphs 51-52 pertaining to effective date have been deleted
as ASLB 36 would become mandatory for Local Bodies in a
State from the date specified by the State Government
concerned.
(c) Paragraph 2A pertaining to applicability of ASLBs has been inserted in
ASLB 36 in line with other issued ASLBs.
(d) ASLB 36 makes a reference to the various ASLBs that are yet to be
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formulated/ issued. Clarification on obtaining guidance in regard to
those ASLBs has been incorporated in the ASLB.
(e) Additional commentary has been provided in ASLB 36 with regard to
the provisions that may not be applicable to the local bodies but may
be applicable to corporate municipal entity or any entity controlled by a
local body having a structure of corporate or equivalent.
(f) ASLB 36 permits the use of financial statements of the associate
drawn upto a date different from the date of financial statements of the
investor when it is impracticable to draw the financial statements of the
associate upto the date of the financial statements of the investor. The
length of difference in the reporting dates of the associate or joint
venture should not be more than three months. IPSAS 36 prescribes
no such time limit.
(g) Both ASLB 36 and IPSAS 36 require that similar accounting policies
should be used for preparation of investor‟s financial statements and in
case an associate uses different accounting policies for like
transactions, appropriate adjustments shall be made to the accounting
policies of the associate. ASLB 36 provide exemption to this that if it is
not possible to make adjustments to the accounting policies of the
associate, the fact shall be disclosed along with a brief description of
the differences between the accounting policies. IPSAS 36 provides
that the entity‟s financial statements shall be prepared using uniform
accounting policies for like transactions and events in similar
circumstances unless, in case of an associate, it is impracticable to do
so.
(h) As per ASLB 36, investor‟s share of losses in the associate is
recognised to the extent of carrying amount of investment in the
associates. As per IPSAS 36 carrying amount of investment in the
associates or joint venture determined using the equity method
together with any long term interests that, in substance, form part of
the entity‟s net investment in the associates or joint venture shall be
considered for recognising entity‟s share of losses in the associates or
joint venture.
(i) Where an entity is precluded by IPSAS 29 from measuring the retained
interest in a former associate or joint venture at fair value, IPSAS 36
permits an entity to use carrying amount as the cost on initial
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Compendium of Accounting Standards for Local Bodies (ASLBs)
recognition of the financial asset whereas ASLB 36 prescribes that
where it is impracticable to determine the fair value of retained interest
in a former associate or joint venture, the measurement may be done
at carrying value.
(j) Some examples have been included in ASLB 36 in the context of Local
Bodies in India.
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Investments in Associates and Joint Ventures
Appendix 2
Note: This Appendix is not a part of the Accounting Standard for Local
Bodies. The purpose of this Appendix is only to bring out the major
differences, if any, between Accounting Standard for Local Bodies (ASLB) 36
and the Existing Accounting Standard (AS) 23, ‘Accounting for Investment in
Associates in Consolidated Financial Statements’.
Comparison with Existing AS 23, ‘Accounting for
Investment in Associates in Consolidated Financial
Statements’
ASLB 36 uses different terminology, in certain instances, from existing
AS 23. The most significant examples are the use of the terms "net
assets/equity", "economic entity", "controlling entity" and "controlled
entity" in ASLB 36. The equivalent terms in existing AS 23 are "equity",
"group", "parent" and "subsidiary".
ASLB 36 requires that after application of equity method, including
recognising the associate‟s or joint venture‟s losses, the requirements
of “guidance on financial Instruments” should be applied to determine
whether it is necessary to recognise any additional impairment loss.
With regard to impairment, Existing AS requires that the carrying
amount of investment in an associate should be reduced to recognise
a decline, other than temporary, in the value of the investment
In ASLB 36, the „Significant Influence‟ has been defined as „power to
participate in the financial and operating policy decisions of the
investee but is not control or joint control over those policies‟. ASLB 36
defines joint control also. In existing AS 23, „Significant Influence‟ has
been defined as „power to participate in the financial and/or operating
policy decisions of the investee but is not control over those policies‟.
ASLB 36 requires application of equity method in financial statements
other than separate financial statements even if the investor does not
have any subsidiary whereas AS 23 requires application of the equity
method only when the entity has subsidiaries and prepares
consolidated financial Statements.
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Compendium of Accounting Standards for Local Bodies (ASLBs)
One of the exemptions from applying equity method in existing AS 23
is where the associate operates under severe long-term restrictions
that significantly impair its ability to transfer funds to the investee. No
such exemption is provided in ASLB 36.
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